In Translation: Incomes to Bounce Back by 2020, Pensions Won’t At All

Article by Olga Kuvshinova and Aleksandra Prokopenko. Translation by Nick Trickett. 

mobile_high-1tg4
Pensioners, under the Ministry of Economic Development’s plan, will pay for growth today or tomorrow. Will the Kremlin risk throngs of angry babushki? (Photo: Andrei Gordeyev)

In the target scenario of its macroeconomic forecast through 2035, which assumes a growth rate higher than the world average, the Ministry of Economic Development sees near zero real growth for pensions over the next 20 years (“Vedomosti” has seen the document).

To raise the economy’s growth rate in the target scenario, the plan proposes increasing the number of those employed, boosting investment activity, and improving labor productivity. Employment growth is achieved, among other things, by raising the retirement age to 65 for men and 63 for women following from the demographic parameters presented in the forecast. The number of pensioners by 2035 falls 23%, or by 7 million people compared to 2017 (without reforms, it increases by 5.4 million people) with the growth in total employment by a million (without reforms, a decrease of 3.2 million).

However, the increase in the retirement age is accompanied by a sharp drop in the level of pensions: their size in relation to wages falls from the current 35% to 22%. In this way, at least a fifth of the population not only won’t benefit from the realization of the plan to increase the economic growth rate but will lose: their incomes will actually fall in relative terms.

In this way, at least a fifth of the population not only won’t benefit from the realization of the plan to increase the economic growth rate but will lose: their incomes will actually fall in relative terms.

This double reduction – the replacement rate and the number of pensioners – will almost halve the ratio of pension outlays to the National Pension Fund – from 28% to 15%. Then investments can grow 1.5-2 times faster than the economy, and productivity faster than wages.

Wages and incomes will grow more slowly than the economy over the next two decades, growth that, per the prognosis, won’t be outstanding.

In case of the successful realization of reforms, economic growth reaches 3.5% by 2026, after which it will slow down somewhat but by then, the Ministry of Economic Development calculates, world growth will be lower. As a result, the real income of households, which has fallen by 10% over the last three years, will only reach their pre-crisis 2013 levels in 2022.

In comparison with 2016, incomes will increase by 55% over the next two decades, real wages by 56.5%, GDP by 78%, and pensions by all of 2.5%. Their growth resumes in 2024, but they’ll be reduced in real terms until 2032, the Ministry suggests. As a result, pensions will remain 4% below their 2013 level by 2035.

In the target scenario pensions are indexed annually from the 1st of February in line with the previous year’s inflation rate, clarifies an official at the Ministry. Additionally, there are plans to raise pensions from the 1st of April in accordance with the growth of the Pension Fund’s incomes – but by no more than 1% per year. In calculations, pension indexation is reserved for non-working pensioners, he specifies.

According to the forecast, with 2.5% real growth for pensions, the pensions of non-working pensioners increase 20% in real terms over 20 years. This means that converting into today’s rubles, the average insurance pension in 2035 will amount to just a bit more than 13,000 rubles and the pension of a non-working pensioner will increase to about 15,500 rubles.

It would be strange if the savings from an increase in the retirement age weren’t directed – at least in part – to pensions, but to other spending items. It’s a very tough situation, comments an expert (who asked not to be named to avoid a quarrel with Ministry). All the latest proposed innovations in the pension sector — for example, the transfer of a fixed payment to the budget or savings on transfer — are similar to an attempt to make a poverty benefit out of insurance pensions worries Yuri Gorlin, deputy director of the Institute for Social Analysis and Forecasting of the Russian Academy of Science and Technology.

Alexei Kudrin’s Center for Strategic Research (CSR), judging by the Ministry’s calculations, supports increases the retirement age to 65 for men and 63 for women. However, the CSR assumes the age increase and other measures to tighten conditions for the allocations pensions are see maintenance of the salary replacement rate at about the current level: no less than 35%. Raising the retirement age offers some savings, it would be fair to share them with pensioners says Tatyana Maleva, director of the Institute for Social Analysis and Forecasting of the Russian Academy of Science and Technology. There isn’t really talk of raising the pension provision now. Even the realization of the whole range of measures proposed by the CSR allows only to maintain the ratio of pensions and salaries at a socially acceptable level.  The actual freezing of pensions for 20 years is fantastical, Oksana Sinyavskaya, deputy director of the Institute for Social Policy of the Higher School of Economics, believes. It’s socially dangerous. Similar forecasts, apparently, are poorly calculated and don’t take into account how they mesh with reality, she believes.

That a reduction in workloads will lead to increased investment by freeing resources for enterprises is completely unrealistic, says BCS chief economist Vladimir Tikhomirov. Low investment growth is a worldwide problem, he notes: companies aren’t investing, despite historically low interest rates and the colossal sums of cash on their balance sheets. When demand doesn’t grow, there’s no point investing in expansion: it’s highly doubtful that it can be the other way round in Russia, he says. Although, on the other hand, cutting costs really gives a stimulus for investments, he continues, but this is related to automation, robotization i.e. accompanied by a reduction in jobs – it leads to growth in labor productivity but not to employment growth. The situation is aggravated by the growth in the number of pensioners. As a result, states are forced to reduce previous social obligations. By 2035, these world trends will reach Russia, Tikhomirov predicts.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s